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									The Balanced Scorecard
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Every manager knows the mantra “what gets measured gets done” and, throughout the
last century, this truism has been reflected in the development of a complex array of
ratios, measures, analytical tools and software packages.

Most of these, however, focused on measuring financial performance while
measurements of other, more abstract, elements of corporate performance – such as
customer loyalty or employee satisfaction – were generally neglected.

So why was this a problem?

Of course, while it may be tempting to judge corporate performance solely by its
bottom line, it is clear that such a narrow focus can provide an inaccurate picture of the
true health of a business. For example, short-term profitability is a pyrrhic victory
when a customer’s real needs are ignored or if it results in exhausted staff and low
morale.

The balanced scorecard is a response to this challenge – a strategic management and
measurement system that links strategic objectives to comprehensive indicators. It
recognises that companies need a broader range of indicators to assess how the
business is performing overall. In other words, the balanced scorecard focuses
management attention on those key performance indicators which provide a balanced
view of performance.

The Inspiration

The pioneer and father of the Balanced Scorecard is Art Schneiderman, a manager at
the American semiconductor company, Analog Devices. Originally an aerospace
research scientist, Schneiderman was strongly influenced by Jay Forrester’s system
dynamics concepts during his MBA training at MIT’s Sloan School. He then spent six
years as a strategy consultant with Bain working on quality management projects in
Japan.

In 1986, armed with insights into Japanese continuous improvement techniques and a
system-wide perspective on the functioning of the organization, Schneiderman
approached Ray Stata, CEO of Analog Devices, about working for the company. His
approach came at exactly the right time as Stata had just spoken to an irate customer
about the late delivery of a key shipment. As Schneiderman recalls, Stata was
unusually open to ideas: “You can’t innovate in an environment that is not open to
innovation – and that means from the very top, from the CEO, all the way down
through the organisation. And it was clear that Ray was interested. He recognised that
TQM was important. It was the right environment for me and it was the right time for
him.”

Following this meeting of minds Stata asked Schneiderman to develop a quality
improvement process (QIP) to be incorporated into the company’s five-year strategic
plan. This project involved several hundred of Analog’s line managers and encouraged
cross-functional as well as cross-divisional integration. The amount and scope of people
involved, and the fact that the task itself had been assigned by the CEO, contributed to
the project’s legitimacy within the company. It resulted in what Schneiderman labelled
“the corporate performance audit” – an annual plan that identified a number of non-
financial elements that needed to be managed to reach quality targets in five years.

However, due to the five-year horizon, Schneiderman considered that “it would be too
tempting, because of the daily press of other business, to delay QIP implementation,



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given that the only checkpoint was years away”. This triggered the need for a shorter-
term measurement, which was initially named the "quarterly performance audit" and
later renamed the Scorecard.

Initially, the Balanced Scorecard was, according to Scheiderman, a “long-term
unbalanced scorecard”, which featured a set of non-financial goals. The first prototype
introduced a mix of financial/non-financial, results/process and leading/lagging metrics.
And the scorecard underwent several revisions as Schneiderman explained. “The major
challenge in the scorecard resulted from our recognition that although the results
metrics – delivery, outgoing quality and lead-time (as seen by customer) – applied
equally to all of our products, the process metrics – process defect level, cycle time and
yield – differed significantly for our two major businesses. It made no sense to
aggregate these on the corporate scorecard, and so we tracked them separately.”

Opposites Work

A further challenge for Schneiderman – but one that proved a catalyst for the evolution
of the scorecard – was the fact that, while Ray Stata was interested in innovation and
how the organisation and its people worked, Jerry Fishman, the company’s COO, and
later the CEO and President, was more focused on financial performance and the
bottom-line. Insiders referred to the Stata -Fishman partnership as "the two-headed
monster".

“Opposites work very well together, except when you’re in the middle,” reflected
Scheiderman. “And it became very apparent to me early on that I was in the middle
and that I had to manage them both.”

The differing approaches of the company’s two leaders were especially clear at the
monthly business meetings which were chaired by Schneiderman. “I would always put
the non-financial performance measures first on the agenda, followed by the financial
measures, and Jerry Fishman would switch them around,” he said.

However, Schneiderman was an innovative thinker. He had already been to Motorola
and seen how they integrated non-financial performance measurement reviews into
financial business meetings, and, when he was challenged to find a way to make both
Stata and Fishman happy, this insight proved helpful. “I suddenly realised that the best
thing to do was to try to combine the two items on a single slide,” he said.

It was agreed that there would be no more than three financial measures along with
the non-financial measures on a slide, and it was then suggested that "corporate
performance audit" needed to be changed to "corporate scorecard". Soon after, each
division in the company had its own scorecard in support of the Corporate Scorecard
and, so the Analog Devices scorecard was born. Said Art Schneiderman, “It evolved,
but not a great deal. What changed over time were the things that went on the
scorecard, not the financials but the non-financials.”

Validation

Art Schneiderman’s Corporate Scorecard was developed in 1987, and after its
implementation at Analog it wasn’t long before it captured the attention of a much
larger audience.

The wider appreciation of the scorecard concept came when Schneiderman approached
Robert Kaplan at Harvard Business School to seek out his insights into activity-based
costing. Kaplan visited Analog, and Schneiderman gave him a background presentation
on the company. Later, Kaplan invited Schneiderman to sessions he taught at Harvard
that used Analog as an example. The scorecard formed a relatively minor part of these
sessions, but it was this idea which clearly attracted the audience’s interest.

Kaplan and his co-author David Norton then used Analog Devices as an example in an
article in the Harvard Business Review (although the company was not named). This
exposed Schneiderman’s innova tion to the business world and also ensured that the
concept was codified, generalized, and shown to be applicable to a much larger
audience. In hindsight it seems quite probable that had Kaplan not met Schneiderman




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at this time the scorecard concept might well have withered and died inside Analog
Devices.

So what was it that Kaplan and Norton realised was so valuable in this approach? David
Norton explained: “Bob Kaplan and I had this research group that we were leading, and
it started with the objective of finding a better way to manage. Our first conclusion was
that you can’t throw away the financials – that is the lifeblood – but you’ve got to
somehow make it long term as well as short term. And so balancing just came naturally
to describe that. We’re balancing long term and short term, we’re balancing lead
indicators with lag indicators – so it was a natural outcome. I can’t remember seeing a
flash of light.”

Dissemination

David Norton may not remember seeing a flash of light, but Schneiderman does. As the
concept caught on, he suggested that part of his inspiration came from an unlikely
source – an advertisement for peanut butter cups.

“I was half-watching the TV when a familiar commercial aired for Reese's Peanut Butter
Cups, a candy bar consisting of a core of peanut butter covered with milk chocolate. As
I remember it, a jar of peanut butter and a chocolate bar are walking along two
intersecting streets and as they round a building they collide. The resulting exchange
went something like the jar and the chocolate bar, each saying, in effect, you spilled on
me! Suddenly the light bulb lit. Combine the financial and non-financial metrics as a
single agenda item.

"So I added a small number of key financials at the top of the scorecard, and the
problem was solved to everyone's satisfaction. The argument that we should limit the
number of financials because they had such high historical organizational weight was
persuasive and so we adopted a rule of 1:6 for the ratio of financial to non-financial
metrics.”

The Kaplan and Norton article appeared in the January/February 1993 edition of the
Harvard Business Review and ensured the mass popularization of the concept.

In the article Kaplan and Norton compared running a company to flying a plane. The
pilot who relies on a single dial is unlikely to be safe, they suggested. Pilots must
utilize all the information contained in their cockpit. “The complexity of managing an
organization today requires that managers be able to view performance in several areas
simultaneously,” said Kaplan and Norton. “Moreover, by forcing senior managers to
consider all the important operational measures together, the balanced scorecard can
let them see whether improvement in one area may be achieved at the expense of
another.”

Kaplan and Norton’s article suggested that companies needed to balance four key
perspectives, as follows:

    4 The customer perspective. Companies must ask how customers perceive them.

    4 The internal perspective. Companies must ask what it is that they must excel at.

    4 The innovation and learning perspective. Companies must ask whether they can
      continue to improve and create value.

    4 The financial perspective. Companies must ask how they look to shareholders.

According to Kaplan and Norton, by focusing energies, attention and measures on all
four of these dimensions, companies become driven by their mission rather than by
short-term financial performance. Crucial to achieving this is applying measures to
company strategy. Instead of being beyond measurement, the balanced scorecard
argues that strategy must be central to any process of measurement – “A good
balanced scorecard should tell the story of your strategy,” they said.

However, the originator of the idea, Art Schneiderman, who left Analog in 1993, has
some mixed feelings about the popularisation of the concept. “In my subsequent




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consulting I discovered that the big problem that organisations have in implementing
the balanced scorecard is that they don’t have tools in place for achieving the goals .
The scorecard is not the key thing, it’s how you’re going to implement the changes –
that’s the key thing. You have to have a well documented, well understood process
that you refine each cycle you work on the scorecard. This process will ensure you
know how you’re going to do it and then, how are you going to achieve the goals that
you come up with.”

Further Reading

Robert S. Kaplan and David P. Norton, The Balanced Scorecard: Translating Strategy
into Action, Harvard Business School Press, 1996.

Robert S. Kaplan and Robin Cooper, Cost and Effect: Using Integrated Cost Systems to
Drive Profitability and Performance, Harvard Business School Press, 1998.

Ray Stata, "Organisational Learning: The Key to Management Innovation", Sloan
Management Review, 1989.

About Ray Schneiderman: www.schneiderman.com




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